In any market environment, fixed income can play an important role in portfolio construction. For Canadian investors, bonds can help reduce risk in equity-heavy portfolios, provide a more steady income stream, and improve stability during periods of market uncertainty.
With interest rates being higher than in recent years and economic outcomes being less predictable, fixed income has regained attention as a potential core building block in diversified portfolios.
This article provides a brief primer on fixed income and outlines how Canadian investors can access this broad asset class — particularly through ETFs.
What Fixed Income Is — and Why Investors Use It
Fixed income investments, such as bonds, generally pay regular interest and return principal at maturity. Investors often use them with goal of:
- Generating income
- Reducing portfolio volatility
- Balancing growth-oriented equity exposure
Rather than relying on a single bond, many investors use diversified funds or ETFs to gain exposure across issuers, maturities, and credit quality.
The Canadian Fixed-Income Landscape
For Canadian investors, fixed income typically includes:
- Government bonds (federal and provincial)
- Investment-grade corporate bonds
- Different maturities, from short-term to long-term
Some bonds also offer more specialized features, such as inflation protection or zero-coupon structures. Together, these securities form the foundation of many Canadian fixed-income allocations.
Fixed Income as Building Blocks
One common approach is to use fixed income as a set of flexible building blocks that can be combined and adjusted based on investor goals, risk tolerance, and time horizon. These building blocks may include:
- Government and sovereign bonds
- Corporate credit
- Short-, intermediate-, or long-term maturities
This framework allows investors to more deliberately manage interest rate sensitivity, credit exposure, and diversification, rather than relying on a one-size-fits-all bond allocation.
ETFs have also become a popular way to access fixed income. While passive ETFs that track bond indexes remain common, the Canadian market has also seen growth in actively managed fixed-income ETFs, offering investors additional choice.
The Role of Active Fixed-Income ETFs
Active fixed-income ETFs enable portfolio managers to adjust duration, credit quality, and sector exposure as market conditions change — rather than following an index rigidly. In Canada, a growing number of active ETFs provide access to both Canadian and U.S. bond markets. For example the JPMorgan US Ultra-Short Income Active ETF focuses on short-duration U.S. fixed income, with flexibility across sectors and credit quality and the JPMorgan US Bond Active ETF offers broader U.S. fixed-income exposure, with active management of duration, credit, and sector positioning.
Understanding Broad Bond Allocations
Many investors use broad bond funds or ETFs to attempt to achieve diversification and income. However, these vehicles can encompass varied risk profiles depending on their construction and underlying exposures.
Key considerations include interest rate risk, as bond prices generally move inversely to yields and shifts in the yield curve can affect returns across maturities; credit risk, where issuers with weaker credit fundamentals may experience higher default risk and wider spreads during economic downturns; and sector concentration, as broad bond indexes — and the ETFs that track them — may tilt toward government, provincial, or corporate bonds, each of which can behave differently in periods of market stress.
Without transparency around these exposures, investors may unknowingly hold risks that are misaligned with their objectives or risk tolerance.
Considering Fixed Income in 2026?
Despite recent Bank of Canada rate cuts, longer-term yields have risen alongside U.S. Treasury yields. This likely reflects expectations around slower growth, ongoing inflation pressures, and heightened fiscal and geopolitical uncertainty. Given the strong link between U.S. and Canadian bond markets, developments south of the border have the potential to continue to influence Canadian fixed income.
In this environment, understanding how duration, yield, and risk interact across the bond market may be increasingly important. By focusing on outcomes — such as income, risk management, and diversification — Canadian investors can use fixed income more effectively as a core building block, even as market conditions evolve.
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